Case Law Details
Anish Niranjan Nanavaty Vs Reliance Communications Tamil Nadu Ltd. (NCLT Mumbai)
The National Company Law Tribunal (NCLT), Mumbai Bench dismissed an application filed under Sections 66 and 67 of the Insolvency and Bankruptcy Code, 2016 alleging that a ₹260 crore intra-group assignment transaction involving Reliance Communications Infrastructure Limited constituted a fraudulent transaction intended to defraud creditors.
The Resolution Professional challenged an assignment through which receivables of ₹260 crore due from Reliance Communications Tamil Nadu Ltd. (RCTNL) to Reliance Communications Ltd. (RCOM) were assigned to the Corporate Debtor and reflected as receivables from RCTNL in the Corporate Debtor’s books. The RP alleged that the transaction inflated receivables, increased liabilities toward RCOM despite doubtful recoverability from RCTNL, and was undertaken without a formally executed assignment agreement.
The RP relied on transaction audit reports stating that RCTNL had negligible operations and minimal revenue during the relevant years, making recovery highly doubtful. It was argued that the assignment adversely affected bona fide creditors of the Corporate Debtor and amounted to fraudulent trading under Section 66 of the IBC.
The respondents opposed the application contending that the assignment was a legitimate intra-group adjustment among wholly owned subsidiaries operating as a single economic entity under a common financing structure governed by a Master Security Trustee Agreement. They argued that the transaction was reflected in the books of all entities, involved only journal entries without any cash outflow, and caused no loss to creditors.
The Tribunal observed that Section 66 requires proof that the business was carried on with intent to defraud creditors and that persons knowingly participated in such conduct. It noted that the applicant had not demonstrated how the directors failed to exercise due diligence or how creditors suffered any actual prejudice because of the transaction.
NCLT further observed that the assignment involved no transfer of property or cash payment by the Corporate Debtor and that the lenders had treated the group entities as a single borrowing unit. The assignment was also disclosed in related-party transactions and reflected in the books of all concerned entities.
Relying on the NCLAT judgment in Renuka Devi Rangaswamy v. Madhusudan Khemka, the Tribunal held that intent to defraud must be judged by its effect on creditors. Since the impugned transaction had no effect on the position or status of creditors, the essential ingredients of Section 66 were not established. Accordingly, the application was dismissed.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. The present Application IA 941 of 2021 is filed on 28.03.2021 by Mr. Anish Niranjan Nanavaty (“Applicant”) Resolution Professional in the corporate insolvency resolution process (“CIRP”) of Reliance Communications Infrastructure Limited (“Corporate Debtor”), under Section 66 and 67 of the Insolvency and Bankruptcy Code, 2016. The Applicant has made following prayers:-
a. Order and declare that the Impugned Transaction, whereby receivables worth INR 260.00 Crore due from RCTNL to RCOM was assigned to the Corporate Debtor herein by RCOM and was treated as a loan due to the Corporate Debtor from RCTNL in the Corporate Debtor’s books of accounts, constitutes a fraudulent transaction under Section 66 of the Code and grant consequential reliefs thereto;
b. Grant any other relief, including under Section 66 and 67 of the Code, that this Hon’ble Tribunal may deem fit.
2. Reliance Communications Tamil Nadu Ltd. (“RCTNL”), a wholly owned subsidiary of Reliance Communications Ltd. (“RCOM”), is the original respondent herein, being a party to an assignment of payables due to RCTNL to RCOM to the Corporate Debtor. The corporate debtor is also a wholly owned subsidiary of RCOM, thus RCTNL and corporate debtor are related as fellow subsidiaries of RCOM.
3. It is stated by the applicant that the Board of Directors of the Corporate Debtor during FY 2014-15 comprised of Suresh M. Rangachar, Shrenikbhai Vaishnav Rameshchandra, Gautam Bhailal Doshi, Hasit Navinchandra Shukla, Dagdulal K Jain and Nilesh Balu Nawale, Alpna Doshi during that time. Consequent to directions of this tribunal, these board members were also impleaded as Respondents in this application as Respondent No. 2 to 8 respectively and RCTNL was numbered as Respondent No. 1.
4. The CIRP of Corporate Debtor commenced vide order dated 25.09.2019 passed by this Tribunal in an application filed by the State Bank of India under Section 7 of the Insolvency and Bankruptcy Code, 2016 appointing the Applicant herein as the Interim Resolution Professional who was later confirmed as Resolution Applicant.
5.It is stated by the applicant that, in compliance of his duties under the Insolvency and Bankruptcy Code, 2016, the Applicant appointed auditors Batliboi and Purohit, Chartered Accountants to conduct a transaction audit of the Corporate Debtor in terms of approval of CoC accorded in the meeting held on 31.10.2019 as per the provisions of the Insolvency and Bankruptcy Code, 2016.
6. Pursuant to the appointment of the Auditor, since there being no employees in the Corporate Debtor, the Applicant reached out to certain representatives / management officials who have been assisting the Applicant in management of the affairs of the Corporate Debtor (“Representatives”) for responses / clarifications / justifications in respect of the various transactions identified by the Auditor.
7. The auditors submitted a report dated 24th September, 2020 as well an addendum report dated 18th February 2021 thereto identifying at para 6.2.2 thereof, the assignment of INR 260.00 Crore, which was receivable by RCOM from RCTNL, to the Corporate Debtor on 31.3.2015 as discernible from books of corporate debtor, thus, the assigned amount of INR 260.00 Crore, initially payable by RCTNL to RCOM became payable by the corporate debtor to RCOM in the Corporate Debtor’s books of accounts and receivable from RCTNL by the corporate debtor. The said transaction is being impugned herein as a fraudulent transaction under Section 66 of the Code.
8. It is stated by the applicant that he has written to the Representatives of the Corporate Debtor on 15th September 2020. However, the Representatives of the Corporate Debtor have denied the availability of the assignment letter vide its email dated 17th September 2020. Thereafter, the Auditor was provided with an unexecuted version of the assignment letter having the subject ‘Transfer of liabilities’ dated 31st December 2014 vide email dated 4th December 2020. In view of these facts, it is stated that an adverse inference be taken such that no duly executed assignment letter exists between RCOM, Corporate Debtor and RCTNL. Consequently, it is therefore submitted that the assignment of receivable from RCTNL by RCOM to the Corporate Debtor was done without any formal execution of assignment letter and in complete derogation of minimum due diligence, and this modus operandi cannot be construed to have been done in ordinary course of business.
9. It is further stated by the applicant that, on further scrutiny of financial statements of RCTNL, the Auditor discovered that it had minimal operations in FY 201314 and FY 2014- 15. The revenue from operations for FY 2014-15 was merely INR 20,000/-. For the FY 2013-14, the revenue was a meagre amount of INR 25,000/-. Furthermore, RCTNL had no operations during FY 2015-16 to FY 2018-19. Thus, even at the time of the assignment, it would have been clear to the assignor (RCOM) and the assignee (Corporate Debtor) that the prospect of recovery, on the basis of the financial position of RCTNL, was highly doubtful. Despite this, the assignment was undertaken which had the effect of increasing the receivables in the books of account of the Corporate Debtor. However, the Corporate Debtor is likely to have been aware that this particular amount could never be recovered in the ordinary course of business. Further, The Impugned Transaction has the effect of increasing the liability of the Corporate Debtor towards RCOM despite the doubtful recoverability from RCTNL, and is alleged to be detrimental to the interests of the bonafide creditors of the Corporate Debtor.
10. The Applicant, after analyzing the transaction, has considered the same to be reportable under Section 66 of the Insolvency and Bankruptcy Code, 2016.
11. Respondent No. 1 filed the reply stating that the application is barred by limitation as it impugns a transaction taken place pn 31.3.2015. It is further stated that RCOM assigned the receivable, from answering respondent to the corporate debtor through journal entry debiting Receivable from answering respondent and crediting to RCOM i.e. corresponding receivable and payable created on matching principle and the amount payable to RCOM has not been settled and there has been no cash out flow from the corporate debtor. The said assignment is duly reflected and acknowledged in the books of answering respondent as well as corporate debtor, which is not denied by the applicant as well. Further, mere the fact the executed assignment letter is not available does not make the transaction fraudulent. It is further stated that the banks and lenders are fully aware that the RCOM group operates as a single economic entity, which is established by the concept of ‘Borrower Group’, created comprising of RCOM, RITL, RTL and RCIL and the assets of borrower group have been offered as security in favor of all the lenders. Further, Master security Trustee Agreement (MSTA) signed in March, 2011 by all existing lenders (lenders of new facilities were acceded to the said MSTA through deed of accession) makes each company jointly and severally liable for all the loans of the borrower group. It is further stated that the applicant has simply adopted the views of author of Addendum to Transaction Review report, which is evident from a bare perusal of the Application and in particular paragraphs 6 to 9 thereof, where all the reasons provided by the applicant in support of application emanate from the said Transaction Review Report. It is further stated that the necessary ingredients of section 66 are not proved and the applicant is duty bound to prove the alleged fraud by putting unimpeachable proof and evidence. It is further stated that the applicant has also failed to give his independent opinion and determination as required under Regulation 35A of CIRP Regulations.
12. Respondent No. 2, 4 and 5 filed the reply. Respondent No. 2,4 and 5 have stated that the Applicant has failed to plead or establish any of the mandatory ingredients required to invoke Section 66 of the Code, namely: (i) that the business of the Corporate Debtor was carried on with intent to defraud creditors, (ii) that the Respondents were knowingly parties to such conduct, and (iii) that the impugned transaction resulted in any loss to creditors or undue benefit to any party. Further, Respondent Nos. 2, 4 and 5 had no role, knowledge or involvement whatsoever in the impugned transaction. It is further submitted that (i) for the purposes of Section 66 of the Code, the Applicant must necessarily identify the beneficiaries of the alleged fraudulent conduct and quantify the benefit purportedly derived by them, failing which the application is liable to be dismissed, and (ii) Section 66 of the Code requires the Applicant to demonstrate that the impugned conduct resulted in a discernible loss or had an adverse impact upon the creditors of the Corporate Debtor. It is further submitted that the receivable of Rs. 260 Crores payable by RCTNL to RCOM was assigned by RCOM in favour of the Corporate Debtor, with corresponding entries passed in the books of the respective entities to reflect the said receivable and payable positions. It is further submitted that the aforesaid assignment was effected through accounting / journal entries and did not involve any cash outflow from the Corporate Debtor. Further, the Impugned Transaction constituted a legitimate inter-company adjustment within the Reliance Communications borrower group comprising RCOM, RCTNL, and the Corporate Debtor. RCTNL, Reliance Telecom Limited (“RTL”), and the Corporate Debtor being wholly owned subsidiaries of RCOM, formed an integrated part of the RCOM group structure. It is further stated that pursuant to the Master Security Trustee Agreement dated March 2011, the entities forming part of the borrower group operated within an integrated financing framework and functioned as a single economic unit for the purposes of group financing and debt management. In this context, financial adjustments and assignments between such entities formed part of the internal financial arrangements of the borrower group. Further, Respondent Nos. 2, 4 and 5 were never informed of, nor in any manner associated with, the appointment of the transaction auditor, the conduct of the audit, or the findings purportedly recorded therein, and at no stage were these Respondents issued any notice, questionnaire, or otherwise afforded an opportunity to respond to the observations or conclusions contained in the Transaction Review Report or its Addendum, thus the said Respondents were denied any opportunity to place their explanation on record in relation to the alleged findings prior to the institution of the present proceedings.
13. Heard the Ld. Counsel for the Applicant and the Respondent No. 1, 2, 4 and 5 and perused the material on record.
14. Indubitably, Respondent No. 1 and the Corporate Debtor are wholly owned subsidiaries of RCOM, and the corporate debtor as well as RCOM were admitted into CIRP around same time. The assignment transaction, impugned as fraudulent in the present application, has created a debt payable to RCOM, the holding company of corporate debtor, and a corresponding receivable due from RCTNL.
15. On perusal of the application, it is noted that the principal grievance of the applicant arises from the fact that, the corporate debtor has taken an obligation towards RCOM which was otherwise due from RCTNL, and, in return, the corporate debtor has taken over responsibility to realise the receivable from RCTNL which otherwise rested with RCOM. It is alleged that, in this process of assignment, the corporate debtor has assumed a liability for a corresponding receivable, which has no value in view of RCTNL having no operations and liquid funds. Further, the applicant has drawn adverse inference on account of executed version of assignment letter not available on record, and even unexecuted version having been provided after considerable lapse of time.
16. The findings of the applicant and conclusion is summarized in para 9 of the application, which reads as under :
9. The Applicant has analysed the Impugned Transaction and has determined that the same would tantamount to a fraudulent transaction under Section 66 of the Code, on the following grounds:
i. The Corporate Debtor has accounted the assignment of INR 260 crores from RCOM as a loan given to RCTNL. This was done despite of RCTNL being under financial distress at the relevant time. Moreover, based on the information available with the Applicant, it appears that there was no formally executed assignment letter between RCOM, RCTNL and the Corporate Debtor to effect the Impugned Transaction and the same has been undertaken without due process and due diligence.
ii. The Impugned Transaction has the effect of inflating the receivables in the books of accounts of the Corporate Debtor, and consequently present an inaccurate picture of the financial status of the Corporate Debtor to third parties. Despite meek possibility of recoverability of the assigned amount from RCTNL, the Corporate Debtor did not categorise the receivables from RCTNL as ‘doubtful’ till CIRP commencement date. The provisioning would have at least provided a true and fair picture of the actual receivables.
iii. The Impugned Transaction has the effect of increasing the liability of the Corporate Debtor towards RCOM despite the doubtful recoverability from RCTNL. There can be no justification for admitting liability on behalf of a group company, which is financially distressed.
iv) The effect of such transaction has been an increase in the liability of the Corporate Debtor and is detrimental to the interests of the bonafide creditors of the Corporate Debtor.
17. Section 66(1) of the IBC provides “ (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.” . Further, the explanation to section 66, which covers both 66(1) and 66(2) provides that “Explanation.—For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.”
18. It is noted that the applicant has not averred in the application as to how the Respondent No. 2 to 8 have failed to exercise due diligence reasonably expected from a person carrying out the same functions as required from each of them, and the applicant has also not filed any rebuttal in relation to this specific ground taken by Respondent No. 2, 4 and 5 in their reply.
19. It is noted that the parties to the assignment, namely the corporate debtor, RCTNL and RCOM are group company related to a wholly owned subsidiary and holding company thus constituting a single economic entity. It is also noteworthy that the assets of corporate debtor were found insufficient in its CIRP to meet its obligations fully towards it secured lenders, thus leaving the unsecured creditors penniless. If the allegation of the applicant is considered in this factual context, it can be noted that even if corporate debtor received a receivable, realization from which was doubtful, owning of such liability to RCOM can not said to detrimental to the interest of its other creditors in such situation.
20. Indubitably, section 66(1) of the IBC vests power in this tribunal to pass an order requiring a contribution from any persons who were knowingly parties to the carrying on of the business with intent to defraud creditors of the corporate debtor or for any fraudulent purpose.
21. In case of Renuka Devi Rangaswamy vs Mr. Madhusudan Khemka (NCLAT Chennai), (2023) in 384 NCLAT, the necessary ingredients for impugning a transaction in terms of Section 66 of the Code were laid down. The relevant part of said decision reads as follows :
“33. To be noted that, the expression `Party to the carrying on business’, indicates `taking positive steps’, in carrying on `company’s business’, in a `fraudulent manner’. The intent to `defraud’, is to be judged, by its `effect’ on a `Person’, who is the `object of conduct’, in question.
34. A `preponderance of probability suffices’, but the degree of probability must be such that the `Tribunal’, is satisfied and further that under Section 66 of the I & B Code, 2016, it is not essential to attract that there ought to be a `Debtor’ and a `Creditor’ relationship.
xxx xxx xxx
38. The Appellant has a `duty’, to establish to the satisfaction of this `Tribunal’, that a `person’, is knowingly carrying on the business with the `Corporate Debtor’, with an `dishonest intention’, to `defraud’, the `Creditors’. For a `Fraudulent Trading’ / `Wrongful Trading’, necessary materials are to be pleaded by a `Litigant’ / `Stakeholder’, by furnishing `Requisite Facts’, so as to come within the purview of the ingredients of Section 66 of the I & B Code, 2016. Suffice it, for this `Tribunal’, to pertinently point out that the ingredients of Section 66 (1) and 66 (2) of the I & B Code, 2016, operate in a different arena.”
22. It is an admitted fact that the said assignment took place by way of journal entry and had not involved transfer of any property of the corporate debtor even by way of set of, and no money was paid by the corporate debtor (there is no pleading in the application contrary to this fact). The lenders of the corporate debtor as well as its holding company had treated the corporate debtor and its operating subsidiaries, namely RITL, RTL and RCIL as single borrowing unit and had obligated all these companies responsible for debt obligation of the other. The assignment is duly reflected in the books of the corporate debtor as well as that of RCOM and RCTNL, and the assignment is disclosed in the ‘Related Party transactions’ thus making aware of all the stakeholders, particularly the creditors about such intra-group company. There is no allegation of any other clandestine intent behind such assignment other than transfer of obligation of RCTNL due to RCOM to corporate debtor. It is also noted that the applicant has also not demonstrated as to how the present transaction, in view of afore stated facts, defrauds the creditors of the corporate debtor, and what loss is caused to such creditors on account of such transaction. As held in the Renuka Devi Rangaswamy (Supra), the intent to `defraud’, is to be judged, by its `effect’ on a `Person’, who is the `object of conduct’, in question. Accordingly, the assignment can not held to be carried out with intent to defraud creditors of the corporate debtor when such transaction had no effect on their position or status.
23. In view of aforesaid discussion, we are of considered view that the transaction impugned in the present application does not satisfy the ingredient of section 66 of IBC, hence, the prayers as sought can not be allowed.
24. In terms of above, IA (IB) 941 of 2021 is dismissed and disposed of.
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